Edited version of private ruling

Authorisation Number: 1011811173706

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Ruling

Subject: Storm Financial Collapse

Question 1: Is the equity component of the margin loan offer that you received, considered to be additional capital proceeds for the sale of your investments in Storm Financial Index Sharemarket Fund (Storm) in the relevant income tax year?

Answer: Yes.

Question 2: Is the borrowers home loan offer amount that you received additional capital proceeds for the sale of your investments in Storm in the relevant income tax year?

Answer: Yes.

Question 3: Is the indebtedness released and waived amount on the investment home loan additional capital proceeds for the sale of your investments in Storm in the relevant income tax year?

Answer: Yes.

Question 4: Is the interest component on the equity of the margin loan offer amount that you received assessable income in the relevant income tax year?

Answer: Yes

Question 5: Are the legal fees that you incurred in relation to the Storm Commonwealth Bank of Australia (CBA) Resolution Scheme form part of the cost base of your investments in Storm which were sold in the 200X-0X income tax year?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2009

Year ended 30 June 2010

The scheme commenced on

1 July 2008

Relevant facts

You were a client of Storm and you received financial advice from Storm.

On the advice of Storm and with Storm's assistance, at various time, you applied for one or more home loans from the CBA retail division and one or more margin loans from the CBA Colonial Geared Investments division.

At various times, the CBA retail division approved the home loan applications and advanced funds to you under one or more loans.

The loans were secured by one or more registered mortgages a specified property.

Your spouse passed away in 200X, however, a loan remained in joint names.

Proceeds of the facilities comprising the home loan were used from time to time by you to purchase various investments on the advice of Storm, which were then offered by you to the CBA (together with investments to be purchased with the proceeds of the proposed margin loan) as part of the security for the proposed margin loan (security).

Colonial Geared Investments approved the margin loan application and the margin loan was advanced to you against the security.

Proceeds of the home loan were used from time to time by you to purchase additional security on the advice of Storm, which in turn was used to increase the borrowings under the margin loan.

The security may have included units in a Storm-badged index fund for which the responsible entity was a CBA party.

The CBA notified you and/or Storm (as your agent) of the security value and the loan-to-security rations of the margin loan from time to time.

Between a specified period one or more (but not necessarily all) of the following occurred in relation to the margin loan:

(a) the current loan-to-security ratio of the margin loan exceeded the base loan-to-security ratio

of the margin loan

(b) the margin loan went into margin call when the current loan-to-security ratio of the margin

loan exceeded the margin call loan-to-security ratio

(c) the CBA notified Storm, as your agent, of the margin call

(d) the margin loan went into default

(e) you converted some, or all, of the security held as securities or units in managed funds

into cash held in an accelerator cash account as security

(f) you sold some, or all, of the security to repay indebtedness under the margin loan

(g) the CBA sold some, or all, of the security and applied the proceeds to repay

indebtedness under the margin loan

(h) the margin loan was repaid, including through the breakage of any fixed rate component of

the margin loan

(i) break costs were charged to the margin loan by the CBA in relation to the breakage of a

fixed rate component of the margin loan;

(j) one or more of the index funds comprising the security was suspended and/or closed by

the relevant responsible entity;

(k) the margin loan was closed

(l) the security sale proceeds were insufficient to cover your indebtedness under the

margin loan and there remained money owing by you to the CBA under the margin loan.

Returns generated by the security are no longer available to you to apply towards meeting, or are insufficient to meet, repayment obligations under the home loan or (if different) the current loan.

You have, either directly, or through your lawyer, or both, made a claim against the CBA for compensation concerning the circumstances of the home loan, the margin loan, the security, the repayment of indebtedness under the margin loan and/or the repayment of indebtedness under the home loan.

The parties have participated in a dispute resolution process known as the Storm Resolution Scheme (Scheme) under a specified case number on the terms set out in the Borrower Deed (Deed).

As a result of their participation in the Scheme and the CBA's construction of a Proposal, the parties have agreed upon:

(a) the release and waiver of certain amounts of indebtedness owed by you to the CBA

(b) the closure, variation or replacement of the margin loan as set out in the Deed

(c) the payment of certain amounts to you by the CBA; and

(d) the releases which are set out in the Deed.

The Deed provided for a settlement amount which comprised:

The net margin loan offer amount for the totality of your margin loan is specified.

You have received the settlement amount.

The details of the specified case number, comprised of your net settlement amount, which was made up of:

· the net margin loan offer, plus

· the home loan offer amount, minus

· the scheme costs.

The status of margin loans consisted of:

· loan one - closed, and

· loan two had an outstanding balance.

When loan two was closed all the liabilities you had under this loan were discharged and extinguished in full, in effect your indebtedness was released and waived.

You have provided a copy of the Deed. This document is to be read in conjunction with and forms part of this private ruling.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 108-55

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 104-25

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 116-20

Reasons for decision

The payment that you received from the CBA was made up of a number of components. The equity component is additional capital proceeds in relation to your assets that were sold by CBA or its related bodies. The borrower's home loan offer and the indebtedness and waived amount are also considered to be additional proceeds. The interest component is assessable as income. .

Capital gains tax (CGT) consequences - equity component, Borrowers Home Loan offer and indebtedness released and waived

The general CGT provisions are set out in Part 3-1 of the Income Tax Assessment Act 1997 (ITAA 1997). Under the CGT provisions a taxpayer will make a capital gain or capital loss only if a CGT event happens.

To determine if a CGT event happens in respect of a compensation payment it is necessary to consider the nature of the asset to which the compensation payment relates.

The Commissioner's policy on the treatment of compensation payments is set out in Taxation Ruling TR 95/35 (capital gains: treatment of compensation receipts).

TR 95/35 states that the particular asset for which compensation has been received by the taxpayer may be:

· an underlying asset

· a right to seek compensation, or

· a notional asset in terms of subsection 160M(7) - (section 108-55 of the ITAA 1997).

(TR 95/35 provides legislative reverences that relate to the Income Tax Assessment Act 1936. The equivalent provisions in the ITAA 1997 are cited where appropriate.)

In determining which is the most relevant asset is often appropriate to adopt a 'look through' approach to the transaction or arrangement which generates the compensation receipt.

In TR 95/35 the term 'underlying asset' is used. The underlying asset is defined in TR 95/35 as:

the asset that, using the 'look-through' approach, is disposed of or has suffered permanent damage or has been permanently reduced in value because of some act, happening, transaction, occurrence or event which has resulted in a right to seek compensation from the person or entity causing that damage or loss in value or against any other person or entity.

If there is more than one underlying asset, the relevant underlying asset is the asset which leads directly to the payment of the amount of compensation. For example, if a taxpayer receives an amount of compensation for the destruction of his or her truck, the truck is the underlying asset.

Taxation Ruling TR 97/3 also discusses compensation and deals with compensation received by landowners from public authorities. It explains at paragraph 2 that it extends the application of TR 95/35 and should be read in conjunction with that ruling.

Paragraphs 4 to 8 of TR 97/3 discuss the compensation received from a public authority for the compulsory acquisition of an easement and states that:-

4. Compensation in respect of an easement created by statute in favour of a public authority cannot be said to have been received for the grant of the easement. The Land Acquisition (Just Terms Compensation) Act 1991 (NSW) and similar Acts in other jurisdictions enable public authorities to take land or an interest in land (including an easement) for specified purposes and confer on the affected landowner a right to compensation. In these circumstances, the landowner cannot be said to have created an asset as required for subsection 160M(6) of the Act (now includes 104-35 of the ITAA 1997) to apply. The easement is created by operation of the relevant statute and is vested in the public authority. This constitutes a compulsory acquisition of the easement.

5. The compensation received by a landowner from a public authority that compulsorily acquires an easement is not excluded from the scope of TR 95/35 by paragraph 2 of that Ruling which states that:

'This Ruling does not consider:

* .....

* amounts received for the grant of easements, profits a prendre and licences - these are covered in detail in Taxation Ruling IT 2561 and in Taxation Determinations TD 93/235 and TD 93/236'.

6. A strict application of Part IIIA would require the compensation received from a public authority to be treated as consideration in respect of the disposal by the landowner of the right to compensation. However, TR 95/35 focuses on the asset to which the compensation receipt most directly relates. In the case of easements acquired under statute and the consequential disposal of the right to compensation, the most relevant asset is the landowner's pre-existing land with its rights of ownership including, for example, a right to exclude all others. This right to exclude all others is forfeited in part when the easement comes into existence. The loss of part of this right constitutes the disposal of part of the underlying asset (the land) for Part IIIA purposes (paragraph 160M(3)(b) (now 104-25(1) of the ITAA 1997), subsection 160M(1) (now 104-10(2) and 109-5(1) of the ITAA 1997) and section 160R (now 108-5(2)(a) of the ITAA 1997).

7. Paragraph 4 of TR 95/35 states that:

If an amount of compensation is received by a taxpayer wholly in respect of the disposal of an underlying asset, or part of an underlying asset, of the taxpayer the compensation represents consideration received on the disposal of that asset. In these circumstances, we consider that the amount is not consideration received for the disposal of any other asset, such as the right to seek compensation.

8. Applying this approach, an amount of compensation received by a landowner for the loss of part of the rights of ownership is accepted as being consideration received in respect of the part disposal of the underlying asset (the land). The amount is not consideration for disposal of the right to seek compensation.

The ruling also considers a number of other circumstances when a landowner grants an easement on their land and in all but one instance the amount received is treated as consideration in respect of the part disposal of the land.

To the extent that the payment relates to the disposal of an underlying asset, CGT event A1 under section 104-10 of the ITAA 1997 happens.

You and your late spouse were clients of Storm. You applied and were granted home loans from the CBA's retail division. The proceeds of the home loans were used to acquire investments in XX Security on the advice of Storm. These investments included a margin loan with XX Security. The returns generated by these investments were no longer available to you to apply towards meeting, or were insufficient to meet, repayment obligations under the home loan.

The CBA with you and/or with your solicitors have made a claim against the CBA for compensation concerning the circumstances surrounding of the home loan, the margin loan, the security, the repayment of indebtedness under the margin loan and/or the repayment of the indebtedness under the home loans. The parties have reached a settlement.

On the facts of this case, the equity component, borrowers home loan offer and the amount of indebtedness released and waived are all considered to be compensation received as it had a direct and substantial link with the underlying asset (the investments). Accordingly, in line with the guidelines provided in paragraph 4 of TR 95/35 and TR 97/3 it is considered that the compensation amount was received as part of the underlying asset and it was not received for the disposal of any other asset, such as the right to seek compensation.

The equity component of $XXXXXX, borrowers home loan offer of $YYYYYY, and the indebtedness released and waived amount of $ZZZZZ are accepted as consideration received for the disposal of the underlying assets.

Therefore, event A1 in section 104-10 of the ITAA 1997 occurred when your investments were sold:

Interest component

The taxation treatment of the interest component of the payment that you received is discussed in paragraph 26 of TR 95/35 where it states that:

Interest awarded as part of a compensation amount is assessable income of the taxpayer under the general income provisions. If the taxpayer receives an undissected lump sum compensation amount and the interest cannot be separately indentified and segregated out of that receipt, no part of that receipt can be said to represent interest. If the compensation cannot be dissected it is likely that the whole amount relates to the disposal of the right to seek compensation.

In this instance the interest of $10,142.70 has been separately identified and segregated out of the lump sum and is assessable income under the general income provisions in section 6-5 of the ITAA 1997.

Legal fees

The cost base of a CGT asset is generally the cost of the asset when you brought it. However, it also includes certain other costs associated with acquiring, holding and disposing of the asset.

The cost base of a CGT asset is made up of five elements:

1. money or property given for the asset

2. incidental costs of acquiring the CGT asset or that relate to the CGT event

3. costs of owning the land

4. capital costs to increase or preserve the value of your asset or to install or move it, and

5. capital costs of preserving or defending your ownership of or right to your asset.

In your case, there has been a disposal of a CGT asset and the legal fees relate to the additional proceeds. As such, the legal fees that you incurred are included in the cost base.

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